JAS 39, Financial Instruments: Recognition and Measurement, requires companies using IASB standards to fair-value many financial instruments including derivatives, effective January 1, 2005. This standard moved the accounting for financial instruments into sub- stantial agreement with SFAS 115 and 133 and similar standards in Canada. It is an example of the ongoing movement towards international harmonization of accounting standards However, IAS 39 met substantial opposition from the European Union (EU), which has required its members to adopt IASB standards effective in 2005. The opposition arose from concerns of European banks and insurance companies, who claimed that fair value accounting would introduce volatility into their financial statements. As a result, the EU carved out the fair value option and hedging provisions of IAS39.

Required

a. Why would banks and insurance companies be concerned about financial statement volatility introduced by IAS 39? Consider both the balance sheet and income statement in your answer.

b. As international harmonization of accounting standards progresses, there will be increasing pressure on the SEC to accept either FASB or IAS8 standards for firms under its jurisdiction. What would the costs and benefits to firms and investors be if the SEC was to accept either FASB or IASB standards? In your answer, consider the possibility of a "race to the bottom

c. How will the EU carve-outs of IAS 39 affect the likelihood that the SEC will accept either FASB or IASB standards?